The flood of Greece-related headlines continued through Monday. Which were substantial, and which were mere chatter?
In the weekend’s most noteworthy development, finance ministers discussed boosting the EFSF from €440 billion to €2 trillion. The plan assumes a 50% haircut on Greece’s sovereign debt, which could force a few French and German banks to raise capital—but there are many options for them to accomplish this. If the EFSF is increased as outlined, it would be akin to a European TARP, tasked with purchasing the sovereign debt of troubled nations and lending to them as needed, as well as providing liquidity to banks needing capital support. For now, this remains hypothetical, and on Monday, Germany’s finance minister said nothing’s on deck. Then again, eurozone officials have frequently declared one thing and done another later.
Sunday, a French newspaper reported the state offered to recapitalize five major banks to the tune of €15 billion—another in a long line of recent European rumors. France’s central bank chief, Christian Noyer, denied this, saying French banks are well capitalized and don’t need assistance. The denial makes sense: Confirming the rumor would likely further erode confidence in the banking system. Additionally, European banks’overall balance sheet health remains fine—including French banks, which Moody’s confirmed when they downgraded some earlier this month. And as Mr. Noyer also mentioned, funds are already available for troubled banks under a support mechanism created in 2008—one of many European backstops.
Speaking of bank health, European banks are shoring up their balance sheets. This is likely getting more press than it otherwise would because of the peripheral debt situation, but in our view, it doesn’t signal a turning point—it seems more about complying with Basel III.
Merkel “Confident” to Get Own Majority in Key Euro Vote
The Bundestag is scheduled to vote on the July 21 bailout agreement on Thursday. The measure is widely expected to pass, but Ms. Merkel faces a rebellion within her coalition and may have to rely on opposition votes. This bears watching, especially given the potential ramifications for her 2013 re-election campaign, but her latest comments don’t offer additional insight.
Slovak Ruling Party Wants EU Rescue Fund Reshaped to Back It
Slovakia’s prime minister supports the July 21 agreement, but one of his coalition partners announced it won’t vote in favor—unless the measure is amended to require any nation tapping the EFSF to deposit collateral in an international property holding mechanism. The protesting party holds 22 of Parliament’s 150 seats and the coalition’s 79, so the PM will need to find 19 votes elsewhere. But politicking of this sort isn’t unexpected in member nations, especially those governed by fractious coalitions.
Greece Will Do “Whatever It Takes” to Stave Off Default, Stay in Euro Zone
Greece’s finance minster reiterated what he’s said dozens of times: Greece wants to stay in the eurozone and will do what’s necessary. But talk is one thing—the austerity measures passed will say much more about Greece’s commitment and the eurozone’s future. The latest package, pending in Parliament, includes pension cuts, a lower threshold for income tax collection and public sector pay cuts. Debate may be heated, especially given ongoing civil unrest, but it’s likely the package passes and Greece gets its October bailout funds (which are contingent). This is a near repeat of June and will likely recur in December, so expect more stories like this.
Ex-chancellor Alistair Darling weighed in on Greece in a TV interview—not coincidentally promoting his memoirs—saying EU officials have taken too long to find a solution and aren’t heeding lessons learned in 2008. Many commentators have said this in recent weeks, and we can appreciate the frustration of having Greece dominate the headlines for months, but fact is this slow approach is in many ways preferableto a faster solution. Plus, we know of no immediate fix for issues that stretch beyond debt and deficits to economic competitiveness.
As the eurozone periphery’s debt story continues unfolding, expect a lot more talk and speculation and incremental steps toward a long-term solution. The barrage of headlines will likely continue, much of them hinging on rumor and politician-speak. That probably contributes to market volatility, but as Monday’s news shows us, true game-changing developments will likely be few and far between.
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